Two Fun Tools from the MMM Software Department

Whew, things got pretty crazy over the weekend with that controversial guest post. I’d like to lighten up a little bit with two interesting things that MMM readers have created to share with each other.

#1 The Fancy Graphical Version of the Shockingly Simple Math:

Do you remember that post I wrote a while ago, explaining that the solution to all monetary problems lies in understanding and controlling your savings rate, rather than focusing relentlessly on income? It was called The Shockingly Simple Math Behind Early Retirement.

My enthusiastic thanks go out to ‘Kablamo’ from London (and I hope we don’t crash your web server!).

#2: A Savings Extrapolator Tool that Rewards you with a Growing Mustache:

A famous and cheerful Excel spreadsheet ninja who goes by the name Chandoo created a simple but fun spreadsheet that extrapolates 10-year savings from various expenses you promise to slice from your fatty budget. He probably used the formulas from the antique MMM classic article called “Eliminate Short-termitis: The Bankruptcy Disease“. If you just want the numbers, here’s what I said:

to calculate a weekly expense compounded over ten years, multiply the price by 752

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Very Nice…

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Perhaps I’m dense, but I feel this is a bit too simple to work if it doesn’t include the effects of income tax, particularly in a progressive tax system like there is in my country.

Eg, on a gross $100k pa, in my country (New Zealand)I would net about $68k. Suppose I save half and spend half, a 50% savings rate. If I want to retire when I have enough saved to generate a *net* $34k (what I spend) then I actually have to save enough to generate $40k gross.

The details are going to differ depending on which country you live in, but the calculator linked to is going to greatly underestimate the sum required to accumulate, especially for people who are aiming high relative to the top tax threshold.

Great observation Stephen. The salary input to this calculator should be *after* taxes. I need to make that more clear on the site.

However, I would argue that inflation, taxes, and investment return are all guesses and subject to change. So I grouped all those unknown quantities into one number — ‘return on investment’ — to keep the user interface simple.

That said, I do plan to handle taxes.

People who want a better handle on risk and fluctuation from interest/taxes/roi should check out http://firecalc.com/. Its more complicated and not user friendly, but its worth the time to figure out. I would love to add a similar capability someday but thats in the future for now.

I agree with kablamo’s simplification. Thinking in net terms (just like thinking of investment returns only in “after inflation” terms) is the best way to go.

Also, I find that because there are so many variables in our naturally unpredictable lives (post-retirement income, spending changes due to adjustment of life philosophy, moving around to different places), the taxes and investment returns actually become fairly small factors in the equation.

But we have a functioning welfare state, a nationalised healthcare system, compulsory nationalised insurance cover for accident and injury, and no state-level taxes. Once you factor those things in it doesn’t look so bad. There are also chunky rebates for families with children in the lower and middle income brackets. I live in a somewhere closer to a Euro-style social democracy than the US, which means a lot of Mustachian thinking needs adapation to work.

Income taxes can vary quite a bit here in the US too. Last year, we earned less than $40k and we paid more than $2k in taxes – a lot of that was self-employment taxes, but we still owed over $400 at tax time as well.

Hey Stephen, I live across the Pacific from you Down Under. In Oz in 2012 taxes on 40,000 were approx $5550 plus or minus some rebates and adjustments, so about the same. We have compulsory superannuation (retirement plan)which locks up (9%) of income. The beauty of it is if you contribute the right way and wait til the right age, it comes out of the fund tax-free. (No use for ERE, I know). Some tax is paid up front, but not on exit.

Its worth looking at the link to post re taxes that MMM posted…in the comments there is a reply by Neo an Aussie showing some nifty sums re tax dividends. I know NZ is quite likely slightly different (but not as different as US!), but it may not be as bad as its seems. I too struggled with the net/gross figures until I read MMM and started to take more interest in figuring things out for myself.

Hi, Happy! Actually there is a similar though voluntary superannuation savings scheme here called “Kiwisaver”. I contribute 4%, my employer contributes 2%, and I get a $1000 tax credit every year and a lower marginal rate. Given the tax credit and the employer contribution the returns are compelling even if the scheme performance isn’t great (my chosen scheme provider has good form though). I am actually working out my personal ERE model knowing that I’ll get a chunky lump sum out of it at age 65, which means I could have a higher withdrawal rate because there will be a top up later.

I just went and read Neo’s comments in the other thread. We have an equivalent to Australian “franking credits”, so called “imputation credits”. Yes, the imputation credits would make a big difference to me on $40k pa if most of my income came from fully imputed share dividends. Not sure how I feel about being so totally committed to shares, however.

Compound interest truly is the eighth wonder of the world. It’s staggering to see that skipping the coffee, drinking supermarket wine instead of the fancypants stuff, and borrowing books from the library instead of buying them is the difference between muddling through and being a millionaire.

The Latte Factor? Or something like that. Sure saving $5 a day for 30 years will make you a hundred thousand dollars but that’s not likely the biggest chunk of your budget. Although it’s good to be frugal in those aspects, you get more bang for your buck if you focus on the big ticket items in your budget (Pareto principle)–like your mortgage, your car, etc.

Here’s a really nice retirement savings calculator for New Zealanders. I like how you can change the assumptions (such as age of retirement) and assumes that you only need a very modest amount to live on.

Ooohhh, those are two of my favorite original posts, as they involve solid maths for those of us who like the details. I’ve actually had those two posts (and “a millionaire is made ten bucks at a time”) open in my browser for MONTHS so I can re-read them regularly for motivation.

Now I go to play with the fancy-shmancy versions :-)

Also…
“I hope you enjoy these clever tools, and your”
…bit of a cliffhanger there MMM!

I started my job after graduation last year in March and my net worth at that time was -$43,000. Now its zero. I didn’t earn six figure salary, but followed ERE and your blog.
I still suck at many levels in many things like managing time, eating out… But working hard to get rid of my bad habits. I am hoping my net worth will go up, up and up in the coming years.
And I wish I knew about ERE when I was in grad school. I blew all my income on electronics and computers.

Hey mbk, sorry to hear that mate. Learning the lessons of frugality usually start with wasting a bunch of money. At least they did for me ;-)

Curious, where did all that money go if you also had income? Just thinking aloud, but expensive electronics often still retain considerable re-sale value, depending on what they are… Unless you have considerable debt, You may have more net worth than you give yourself credit for. Anyhow, don’t mean to pry, and good luck finding your way above the waves!

Daftshadow, did you see the negative sign in his first sentence? It got text-wrapped so it’s hard to see. I interpret this as a happy story where MBK increased net worth by $43k rather than a sad one where it dropped by 43k.

Mr. MMM, you are right.
And DaftShadow, I was paid as a Research Assistant. And my income for the six years I was in grad school was around $17k-$19k. My regular expenses were low, except for wasting all the savings on very expensive computers and electronics twice a year during tax time and Black Friday.

In 2011, once I started working, I was making myself financially literate. I chanced upon ERE blog and started thinking about money in a different way. And MMM sure shows innovative ways to cut down spending.
Just to show the change in my thinking, I recently paid only $220 for a used Thinkpad as my primary computer.

Fantastic tools, they really make things just that little bit easier to visualise. They’re particularly useful when putting together a budget, just to show what a huge impact making a start on mustachianism really has.

I found an absolutely shocking statistic by using both of these tools together… if your savings rate is currently a non-mustachian 10%, then every dollar you permanently cut from your monthly budget brings your retirement forward by nine days. Or to put it another way… a daily $2 latte on the way to work costs you one year of working! (that’s on a household income of $100k; it would be even better if your salary/expenses were lower).

If people truly realised that their daily latte was costing them a WHOLE YEAR OF HOLIDAY then coffeeshops would go out of business! :)

(incidentally, if you’ve already got a good savings rate, then additional savings off your monthly budget don’t save you quite as many days of work off your career, but it’s still a shocking effect).

True, true. But sometimes it helps to be innovative today, to get the pleasure both now and in the future.

For example, I’d argue that someone who can only save 45% of income, cannot truly afford to be spending $500+ per year buying coffee at coffee shops. But they CAN afford to spend $100 per year to get exactly the same amount of coffee at equal quality, brewed at home.

I drink coffee almost every day, and it’s some of the best stuff you’ll ever taste. But I only buy it at coffee shops a few times a year.

It partly depends on how interested you are in early retirement, as well. With no interest in becoming financially independent in the next ten years, sip away!

I found both “Engineering Your Retirement” and “Your Money or Your Life” basically state that if you value something then cutting it out of your budget may not be the best idea. I think this is a great rule in general.

So if Sacadoh enjoys her coffee and moments with friends, then stopping is probably not the best thing to do–though even at starbucks there are cheaper drinks to be had (like tea or a regular cup of coffee).

It’s like having/saving a back log of Video Games that you bought/or thought about buying over the years, and just not having the time to play it until you reach FI. Then you will play thru them within weeks, (plus get them for dollars) and really get to enjoy each one to it’s fullest.

MMM – Since you have an interest in the environment, and won’t be hurt by a small percentage increase in your coffee costs, and don’t seem to mind people calling you out on far more controversial topics than this, I have to ask:

Are you buying shade grown coffee?

As an ecologist, I like coffee but don’t drink it because of how much tropical land is destroyed for coffee production. But I get that for many, coffee is non-negotiable. Well planned shade-grown coffee at least minimizes the huge world-wide impact this entirely unnecessary product creates.

By unnecessary, I mean that this tropical (often rainforest) land isn’t being destroyed to meet human food/shelter/whatever needs or something that could arguably make it onto a lower level of Maslow’s hierarchy. Coffee, tea, etc. are purely luxury items. If there were fewer people on the planet, I could easily justify putting some tropical land aside for producing these luxuries. Given that tropical forests are disappearing at a frightening rate though, it gets pretty hard to justify a coffee or tea habit if one is up on conservation issues. Again, buying quality shade grown coffee would be at least a great step in reducing the impact of one’s choices, at *very* little personal cost.

Definitely! I’ve been enjoying organic/fairtrade/shade-grown/fancy locally roasted coffee for years – because the Colorado Costco I visit happens to stock it. There, you can get the fancy coffee for less than half of what Safeway will sell the cheapest unknown coffee for. I am amazed to note that getting the more eco-friendly coffee costs barely more than the other options at Costco.

Good point – everyone’s different. I’m not a big coffee drinker, so to me a daily latte from a coffee shop is something that I would just become accustomed to and no longer value after a while. I was thinking of the folk who pick one up to take away and drink it in the lift on the way into work (seemingly 90% of my office).

You could generalise my ‘lattes’ to ‘very regular non-essential costs’. Alcohol from bars is a great example – in my city, $50 a week doesn’t go very far and yet it’s maybe 3 to 5 years less working.

The achilles’ heel in all of this thinking, however, is that it assumes your living costs remain stable over time. In reality, non-mustachians will just feel like they’re depriving themselves of their daily latte and splurge more on a new car instead. So although the numbers look incredible, the real magic is the idea of sticking to a budget that doesn’t creep up year on year (even if your income increases). Mathematically, it’s expenditure inflation which is the killer.

I’ll have to neaten up and distribute the spreadsheet I wrote which drove this point home for me… if you compare a career where you freeze your expenditure (in real terms) and a career where you only save a percentage of your income and spend the rest (i.e. expenditure inflation) then the difference is quite shocking.

(A lot of this is probably not a surprise to you seasoned Mustachians, but I’m a newbie and it’s a novelty to me)

“Real Magic” inflation expendture is why i don’t want to upgrade to a fancier Apartment and pay nearly double what I do now! Though my place is becoming more riskier in the health department, and health is a different form of wealth, which i have to take into consideration.

“I save hard – somewhere between 40 & 50% of my gross income. I still like my fancy coffee though. One every day or so adds to the quality of my life – through conversations with close friends etc.”

Here are some questions to ponder: Can you figure out a way to have the conversations with friends and NOT spend so much on fancy coffee? Are the conversations with friends, or the fancy coffees, adding to the quality of your life? And, would you consider forgoing the expensive coffee (but keeping the conversations alive) knowing that you might be able to shorten your working life by a significant margin?

But what if your networth goes up and down 1% regularly? What if you miss a good tax deduction or are paying too high an interest rate? 2 bucks every once in a while is infinitesimal compared to these. Not that I’m trying to justify silly expenses, we all need a reasonable way to judge value, but sometimes we lose the forest for the trees. And I catch myself feeling good about skipping the Venti Nonfat Nowhip Mocha only to buy some silly $38 eBook ;)

The coffee shop may be enjoyed on occasion once or twice a week for a small premium. For example, swear off the fancy drinks & get a small house coffee, which is usually a buck or two. Also, I am so cheap I have a travel mug bought from my favorite coffee shop, I fill the mug with home brewed coffee, and the stop by the coffee shop & socialize. My coffee shop is so popular that the owners & employees don’t care if you hang out there without buying anything. They also have free espresso every Friday afternoon. So I get the coffee shop experience without all the usual expense.

“I am so cheap I have a travel mug bought from my favorite coffee shop, I fill the mug with home brewed coffee, and the stop by the coffee shop & socialize.”

This is unethical; buying the cheapest coffee is the right thing to do. Bringing your own from home is tantamount to stealing the service the coffeeshop provides.

“My coffee shop is so popular that the owners & employees don’t care if you hang out there without buying anything.”

Are you sure? The owners might say differently. Most coffee shop owners are frustrated by “free riders” who come in and use their space without paying accordingly. They might just be too polite or conflict-averse to tell you otherwise.

I think the biggest breakthrough I’ve had in the past year was realizing the simplicity of gaining FI. I used to think it was so complex I would need to “figure it out” and do something special in order to become FI. Now I’m pushing toward a goal rather than wishing life was more simple. That more simple life is slowing coming.

100% agree James…I’ve been gritting my teeth while my friends at the office try to figure out what financial advisor to use, or what stocks to pick. FI is a slow, simple game that requires dedication; not a puzzle that requires crazy talent or clockspeed.

I had moved all my money to Vanguard already, it was just a formality of letting him know, but it was actually pretty tough to do since he is “such a nice guy”. But he has cost me tens of thousands over the years by pushing certain products, hard not to be mad at they guy either.

This is so true. I’m pretty sure I’m “average” when it comes to being a corporate worker. I don’t have perfect people skills and I can be a tad lazy. For this reason, I’m not going to become a millionaire in 4 years through rising to the top of my organization like Michael J. Fox. I’m the type of person that just needs to cut expenses and live on half or less of my income and save the rest, then not have to deal with a work environment that I’m not cut out for.

Thank you to the creators of these tools! This is exactly what I need in order to show my skeptical boyfriend that I’m not using crazy impossible maths. Your articles were excellent Mr MM but I think visuals will make a bigger impact.

Neat tools, I used the first one but it said I couldn’t retire for another 37.4 years ;( This doesn’t take into consideration that after our house is paid off next year, we will probably be putting away a greater income percentage that will help us retire earlier. Great concept!-Nurse Frugal

1. With a high savings rate, you can retire very quickly no matter what your salary is. Retire in 6 years if you can save 80% of your salary.

2. Cut years off your time to retirement with a small change to your savings rate. Increase savings from 30% to 32% and you will spend 1 less year of your life working.

3. When trying to retire quickly, the key number is your savings rate — not your return on investment. Compound interest is powerful but it takes a long time.

Lets say you and your spouse increase your combined savings from 30 – 50%, That translates to 11.4 years of work less per person! I’d be interested to hear how many years of work others have eliminated.

For me (I believe for many others as well) there is a vicious circle with expenses I have to have because I have to work, but would not have to have if I were retired. Primarily childcare expenses. I have to pay somebody to look after my kids, so I can go to work, so I can earn money and save money. Thus paying for the childcare expenses now postpones my retirement by several years…

I tried out the years to retirement calculator. I think the formula may be messed up, or I’m not understanding what the withdraw rate means. I decrease the withdraw rate and it increases the number of years I have to keep working.

Hi Ted! If you decrease your withdrawal rate you will need to save a bigger lump sum to compensate for the smaller amount of income you are generating from the interest on your retirement nest egg. Therefore it will take longer for you to retire.

I apologize if this has been answered elsewhere, but are RESP contributions considered saving?

Spurred by the savings tool, I’d like to save more aggressively. But how would one priortize (a) paying off debt (at 4%), (b) contributing to RRSP which would generate a tax refund of approximately 50% of the contribution, or (c) contributing to the RESP, which would generate a government grant of 20% on the first $10,000?

By the way, the Networthify calculator is awesome! A suggestion for improvement would be having to enter net expenses instead of % savings – the software then can calculate % savings automatically. As my expenses are fixed, I wanted to play around with various income levels to see how much I need to earn to retire, say, in 5 years. With the current software I had to recalculate % savings each time I adjusted income. No big deal, just spend extra time shuffling between the software and Excel/calculator.

Thanks for the complement Jen! And for the suggestion. I see your problem. I think there have been several requests for a similar sort of feature but you described it in a way that really makes sense to me. I will add something to handle that scenario.

The withdrawal rate is the percentage of your retirement nest egg you will be spending each year. If you decrease your withdrawal rate you will need to save a bigger lump sum to compensate for the smaller amount of income you are generating. Therefore it will take longer for you to retire.

Btw the tool makes 2 assumptions which may be tripping you up:
1. Your current expenses are the same as your expenses after retirement. 2. You want to live off the interest of your retirement nest egg and never draw down the principal — ie your nest egg will not shrink after retirement.

Because you decreased your withdrawal rate, you need a larger nest egg to support your expenses (which did not change, you only decreased your withdrawal rate).

For example, if your expenses are $30K then:
at 4% withdrawal rate you need a nest egg of $750K
at 3% withdrawal rate you need a nest egg of $1M

therefore, you need to work longer to save up the extra $250K.

Remember, your savings rate did not change, which means your expenses did not change! If you want to decrease your spending in retirement, as far as this calculator goes, you will need to change either your income, or your savings rate (expenses are calc’d behind the scene as income minus savings).

Would you help us out by pointing us towards what’s ‘fundamentally wrong’?

MMM, as an engineer, seems to be a big fan of using simple and bold calculations/diagrams to make simple and bold conclusions, aware that additional details often add complexity while only adding a little accuracy.

I’m sure those of a more precise and mathematical outlook would prefer to add in every single detail to create a complex but accurate answer.

It’s just a matter of audiences as well – blog posts are to get big ideas across to casual readers. Detailed calculations may well be a turn-off to “the average reader”.

That said – did you see any big problems with the calculators? For me, the inflation-adjusted returns on investment seem a little high, but that’s kind of a second-order effect in the grand scheme of things.

Oh, I think I might have been being an idiot – I didn’t see the ‘More Options’ link that you can click. I didn’t realise that was adjustable – I just felt 5% real return on investment (everything’s in real terms it seems) is a bit optimistic for planning purposes, i.e. I’d rather be a bit conservative.

I think the calculator actually serves its purpose well – it’s good-looking, simple, and the beauty of it is in showing the dramatic effect that you get from seemingly small reductions in expenditure.

It might be useful to have the option to include mortgage payments in future versions?

Seems like a neat calculator, but as others said one has to be careful to input net numbers. I didn’t see the return on investment until hitting “more options” — 5% after inflation might be a bit high but at least is not excessively optimistic.

Love these, but HELP please. Does anyone know what the formula in the Excel worksheet would be to calculate the daily/weekly/monthly/yearly/one time for Excel 2003? I can convert the file, but the formula doesn’t work in my old Excel. :(

Enjoy your blog. I was linking back to this article and I noticed a difference between the calculation you use for monthly expenses, with a multiplier 173, and the one Chandoo uses on his page of 179. If you look at the screenshot under item number one on this page you’ll see the different number. Let me know which one I should use.

I was wondering if anyone knew of something like a “real” game of Life? I was looking for some sort of video game or board game for my kids where they could make different consumer/college/housing etc choices and see the long term effects, then start over and make different choices and see the difference it makes?

“Whew, things got pretty crazy over the weekend with that controversial guest post. I’d like to lighten up a little bit with two interesting things that MMM readers have created to share with each other.”

What controversial guest post? The previous post is before the weekend and not a guest post?

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